Economists Argue Over the Cost of Caring for the Uninsured

Haraz N. Ghanbari / AP Photos

Starting Monday, the Supreme Court will hear a grueling six hours of oral argument on the defining case of this term, and one of the most prominent in decades: whether the Affordable Care Act’s requirement that everyone buy health insurance—known as the health-care mandate—is constitutional. The case has provoked an unprecedented 136 briefs for and against its constitutionality. Of all these, the two that everyone seems to be talking about are the opposing briefs by two groups of economists. When big-name economists collide, how can we sort out which are right?

The premise of the overall constitutional challenge is that the federal government cannot regulate “commercial inactivity.” In other words, Congress may be able to regulate our commercial conduct, but it can’t force us to engage in commerce, such as by making us buy ordinary products like broccoli or GM cars or, for that matter, health insurance. In fact, this premise is flawed. No constitutional text, history, or precedent has ever indicated that Congress could not regulate commercial inactivity. To the contrary, there are plenty of examples, going back to the very first Congress, where Congress has required us to engage in commercial activity—including making us buy health insurance.

But rather than debating this premise, the economists’ briefs focus on the alternative defense that being uninsured actually involves commercial activity, not inactivity. The economists who support the mandate argue that none of us can control whether we will get sick and need health care next year. Thus, uninsured people generally cannot avoid being “commercially active” in health-care markets. They are, rather, a set of individuals who hope to be commercially inactive but predictably will actually be active. Indeed, 57 percent of the uninsured used medical services in 2007, and all but a few do so within five years.

Therefore, these economists argue, deciding to be uninsured is not “inactivity,” but rather a commercial decision to self-insure the expected costs of unavoidable commercial activity. In other words—you’re going to have to see the doctor eventually, so who pays? Because the uninsured often cannot afford the treatments they need, health-care providers will incur the resulting costs, either out of decency or legal duty, and then pass those costs on to taxpayers and the insured. Indeed, nearly two thirds of the costs of treating the uninsured are paid by others, with the total incurred by providers estimated by Congress to be $43 billion in 2008.

In contrast, if we decide we don’t want to buy broccoli or a GM car next year, we are in full control of that decision. So, we can be inactive in ordinary markets in a way we cannot be for health care, where illness thrusts activity upon us.

So what about the economists who oppose the mandate?

They argue that the amount of cost-shifting caused by the uninsured is smaller than Congress’s $43 billion figure. Many of their objections are economically powerful, but legally their effort falls flat because even they concede that the shifted costs are at least $12.8 billion, and the court has upheld federal laws based on far more trivial effects on interstate commerce. Moreover, in the end, the numbers don’t matter: No one disputes that Congress may regulate commercial activity regardless of whether it imposes costs on others. So even if uninsured people cost us nothing, they are still “active” in the health-care markets, and the opposing brief does not really deny this (even though it quibbles about the precise extent to which that activity is unavoidable).

But, the mandate’s opponents say, fixing the cost-shifting problem isn’t really its central purpose. On the economics, they are right. Whatever the correct amount of cost-shifting, it is a small percentage of U.S. health-care spending. The central purpose was that, without the mandate, other provisions that prohibit discriminating against sick people by denying coverage or charging higher rates would encourage healthy people to put off buying insurance until they get sick. If this were to happen, premiums would go up and the insured pool would get sicker, until the market collapsed.

But their point fizzles legally. Under Supreme Court precedent, an effect on interstate commerce is enough to trigger regulation even if it is “indirect and fortuitous”—in other words, the act’s main motive is legally irrelevant.

The antimandate economists’ argument also suffers because it depends on the Supreme Court analyzing the case in a specific order. First, they argue, the court should consider the mandate on its own, and strike it down as primarily regulating inactivity. Then, they say, the court should strike down the law’s other provisions—such as those prohibiting discrimination against the sick—on the ground that they cannot be severed from the mandate. (Other provisions are not “severable” from an invalid provision if it seems likely that Congress would not have wanted the other provisions in force without the invalid provision.)

But the court could easily reverse the order of analysis. It could first observe that it is undisputed that the law’s nondiscrimination provisions are valid exercises of Commerce Clause power, and then note that it is also undisputed that those provisions could not function without a mandate. This produces the clear conclusion that, whether or not the mandate is authorized by the Commerce Clause, it is constitutional under the Necessary and Proper Clause as reasonably necessary to stop insurers from discriminating.

Finally, the mandate-opposing economists argue that the mandate amounts to a tax on the young and healthy, who will, given the nondiscrimination provisions, end up paying far more for health insurance than they can expect to receive in treatment. Again, this is sound on the economics, but it cuts the other way legally by showing that the mandate could alternatively be held constitutional under Congress’s taxing power. The opponents argue this ground is unavailable because Congress failed to call the mandate a “tax,” but this is a linguistic argument, not an economic one. It is also an argument that shows the opposition is not really about limiting the constitutional power of Congress, because they effectively concede that precisely the same mandate could still be imposed using different language.

In short, even if you buy the flawed premise that Congress cannot regulate commercial inactivity, the mandate-supporting economists persuasively show that being uninsured predictably involves unavoidable commercial activity, and costs taxpayers and others money. The mandate-opposing economists dispute the extent of those effects, but this is an issue where size really doesn’t matter.

(Disclosure: During the Obama campaign, Elhauge supported what then was its position that the mandate would be bad policy, a view he still holds. He has joined an amicus brief of health-law professors arguing that the mandate is constitutional, and is invested in an insurer and a health-provider fund that may benefit financially if the court sustains the mandate.)